Dodd-Frank remains a billion dollar question

Business and IT consultant Rule Financial has published a study into the impact of the Dodd-Frank Act on buy and sell sides, which reveals a huge gap in levels of preparation between the two.

The research finds that sell-side firms are making large changes to their operations and IT, investing heavily in client execution and clearing propositions that will become operational in 2012. The buy-side is taking a different approach, placing a heavy reliance on the sell-side to provide a solution to the problems created by the new regulation. Whilst 70% of the sell-side claim to have finalised their ‘to-be’ business process design, only 20% of buy-side firms have conducted this analysis.

On average, spending by sell-side banks with aggressive OTC strategies has been in the order of (US) $10-50 million annually, since 2010. At the other end of the spectrum, those banks planning to adopt a ‘franchise protecting’ minimum day-1 offering have spent less than $5 million annually over the same period. As expected, buy-side spend has been negligible in comparison, and is estimated to be in the order of $1 million to $2 million for each participant this year.

The regulatory onslaught impacting the full OTC lifecycle has forced the sell-side to appraise their operating models. The research finds that banks are converging OTC, exchange, prime and collateral businesses into a single organisational entity. Due to its significance on P&L, the collateral management department is gaining in importance and receiving heightened attention and investment. Basel III is driving closer integration of the securities lending and repo units.

The survey highlighted that sell-side banks are taking a pragmatic approach to execution support, choosing to support their clients at any venue required. However the research indicates that the buy-side is overwhelmingly in favour of Bloomberg, with the majority of respondents identifying it as the execution venue of choice, trailed by Tradeweb and ICE, both with just over half the support that Bloomberg received. There appears to be little appetite to use the inter-dealer brokers that are currently readying their swap execution facility (SEF) platforms.

The buy-side displayed much confusion over the mandated OTC clearing timelines, with respondents citing a range of deadlines from 1st September 2012, through to 1st September 2015. This lack of awareness reinforces the assumption that the buy-side views the consequences of Dodd-Frank as a regulatory burden, rather than as a positive driver to instigate a change in their business model.

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